Indonesia Hikes Key Rate for First Time since 2014

The central bank of Indonesia rose its benchmark 7-day reverse repo rate by 25bps to 4.5 percent on May 17th 2018, in line with market expectations. It is the first rate hike since November 2014, as Bank Indonesia tries to maintain economic stability amid a falling rupiah, escalating risks in the global financial market and global liquidity downturn. Policymakers added they will continue to implement stabilization measures in line with the rupiah’s fundamental value, suggesting further tightening could be necessary if the rupiah keeps falling.

The lending and the deposit facility rates were also increased by 25bps to 5.25 percent and 3.75 percent respectively.

Policymakers noted that the rupiah depreciated 1.47 percent in the first quarter of 2018 and 1.06 percent in April, sparked by global USD appreciation and that the exchange rate was managed according to domestic economic fundamentals and appropriate stabilization measures. The central bank stated that it will continue to monitor the risk of global financial market uncertainty by continuing the exchange rate stabilization measures in line with the rupiah’s fundamental value.

Domestic economic growth increased in the first quarter of 2018, backed by increasing investment (highest in five years) and resilient private consumption. Also, the current account deficit narrowed to 2.1 percent of GDP from 2.3 percent in the last quarter of 2017. As so, Bank Indonesia anticipates a controlled current account deficit in the 2.0-2.5 percent of GDP range in 2018, remaining within a safe threshold of not more than 3 percent of GDP.

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